Negative sentiment

Over the past 6 weeks the Australian property market has plummeted. The media have reported a significant reduction in auction clearance rates which is a useful measure but has its flaws when used in isolation. Nonetheless, as a person standing on the brink of buying a property over the past 18 months, there is currently a definite sense of trepidation in the market.

A couple of months ago the number of houses for sale in an exclusive suburb exploded. Sales were doing well (actually, picking up since mid 2009) and Australian property rode a wave of enthusiasm. Sentiment has changed. Far fewer houses have hit the market more recently. Three properties that I have watched for some time have sold for significantly less than their original asking price.

No doubt the concerns over the Greek economy and the financial state of the European Union has a lot to do with this negative sentiment as does the rising interest rates within Australia. This may be just enough to tip the scale as Australia is in a rather unusual balancing act. Demand for housing far outstrips supply which drives up prices. Yet prices are overinflated when compared to average income, rental yields, and long-term historical averages. Australian housing affordability is rated as one of the worse if not the worst in the world.

Human sentiment is a powerful force in financial markets. When we are positive we buy up and live the good life. When sentiment is down we sell and markets dip. A rising economy and a falling economy follow a broadly predictable course - that is, until the market turns. What is harder to measure is when sentiment changes. In the main, sentiment bobs up and down with little change in the market on a broader scale. Occasionally the sentiment escalates and leads to dramatic changes or less dramatic “corrections” in the market.

Negative sentiment stemming from fear of the unknown presents an opportunity. And negative sentiment is often just that, a bobble of opportunity in the long-term market trend. In my opinion this is one such time and the Eye of Sauron will now look deeply into the Australian property market. It’s a little too early to predict what will happen next but the negative sentiment is palpable.

I may of course be completely wrong. We could be on a precipice and I am about to take a great stride forward into an abyss. But to be successful one requires a good measure of endeavor and luck. You just have to be more often right than wrong.